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A Study of Stock Price Behavior in Taiwan via Residual Income Valuation Theory and Structural Identification

Author

Listed:
  • Keshin Tswei

    (Dept. of Managerial Economics, Nanhua University, Chia-yi 62249, Taiwan)

  • Chen-Yin Kuo

    (Dept. of Design and Marketing, Tung Fang Design University, Kaohsiung 82941, Taiwan)

Abstract

This study adopts the methodology introduced by Lee (2006) to analyze stock prices in response to information shocks in six of Taiwan's stock market sectors and present market anomalies utilizing behavioral finance theory. Using the Residual Income Model (RIM) of equity valuation, we specified our empirical model to identify structural fundamental and nonfundamental shocks from reduced-form tangible and intangible news, and we obtained three major results. First, fundamental shock is primarily induced by tangible news and nonfundamental shock by intangible news, suggesting that tangible-oriented RIM can capture the information content of stock prices. Second, impulse response analyses show that investors generally underreact to fundamental shocks and consistently overreact to nonfundamental shocks in the short-run. This finding is compatible with the overconfidence theory of Danielet al.(1998) in behavioral finance literature. Third, information diffusion efficiency in a market appears to depend on the value relevance quality of its tangible information. This is based on our finding that when tangible information constitutes a higher share of a market's fundamental shock, its price converges faster to the long-run equilibrium associated with the shock.

Suggested Citation

  • Keshin Tswei & Chen-Yin Kuo, 2012. "A Study of Stock Price Behavior in Taiwan via Residual Income Valuation Theory and Structural Identification," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 15(04), pages 1-26.
    • Handle: RePEc:wsi:rpbfmp:v:15:y:2012:i:04:n:s0219091512500166
    DOI: 10.1142/S0219091512500166
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    Citations

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    Cited by:

    1. Christian Blecher, 2019. "The influence of uncertainty on the standard-setting decision between fair value and historical cost accounting under asymmetric information," Review of Quantitative Finance and Accounting, Springer, vol. 53(1), pages 47-72, July.
    2. Iris Bergmann & Wolfgang Schultze, 2018. "Accounting based valuation: a simultaneous equations model for forecasting earnings to proxy for ‘other information’," Review of Quantitative Finance and Accounting, Springer, vol. 50(4), pages 1057-1091, May.
    3. Chen-Yin Kuo, 2017. "Is the accuracy of stock value forecasting relevant to industry factors or firm-specific factors? An empirical study of the Ohlson model," Review of Quantitative Finance and Accounting, Springer, vol. 49(1), pages 195-225, July.

    More about this item

    Keywords

    Market anomaly; residual income; structural identification; overconfidence; behavioral finance;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance

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